Carnival Corporation & plc (CUK) on Q3 2022 Results - Earnings Call Transcript
Josh Weinstein: Good morning. This is Josh Weinstein. Welcome to our third quarter 2022 business update conference call, my first as CEO. I’m joined today telephonically by our Chair, Micky Arison. And with me here in our Miami offices are Chief Financial Officer, David Bernstein; and our Senior Vice President of Investor Relations, Beth Roberts. Before I begin, please note that some of our remarks on this call will be forward-looking. Therefore, I must refer you to the cautionary statement in today’s press release. Our business continues on a positive trajectory. We’ve been closing the gap to 2019 as we put a stake in the ground internally and shifted from return to service to a relentless focus on return to strong profitability. The occupancy gap to 2019 has reduced from over 50 points in Q1 to less than 30 points in Q3. At the same time, our capacity in service has gone from approximately 60% in Q1 to over 90% in Q3. In fact, in the month of August, we achieved almost 90% occupancy at higher constant dollar revenue per diem despite the impact of future cruise credits. And the differential in adjusted cruise costs, excluding fuel per ALBD, has reduced from over $25 in Q1 down to $10 in Q3. As a result, we were able to generate over $300 million of adjusted EBITDA in the third quarter, overcoming a near doubling in fuel prices. We expect these favorable trends to continue as we finish up 2022 and head into 2023. And while we expect breakeven to slightly negative fourth quarter EBITDA given the seasonality of revenues and our increasing investment in advertising to drive revenue yield in 2023, we do expect second half EBITDA overall to be positive. We’ve also been making strategic changes to our fleet composition that will pay dividends over time. Our global fleet of 91 ships has never been better positioned, thanks to the exiting of 23 smaller, less efficient ships and taking delivery of 9 large and very efficient ships. While we’ll all be four years older than we were in 2019, next year, the average age of our fleet will actually be a year younger than in 2019 at 12 years. It also means our average berth count per ship is increasing nearly 20%, the largest amongst our public peers. We expect benefits of this profile to include a fleet with 10% higher fuel efficiency, 6% more efficiency in remaining operating costs, a richer cabin mix and larger overall platforms to deliver onboard experiences and generate associated revenues. We have also begun to address the brand portfolio to improve ROIC and drive durable top and bottom line growth. In light of the continued closure of cruise operations in China and our Costa brand’s significant presence there pre-COVID, we are reducing Costa’s capacity by 10% from 2019 levels, while bolstering our highly successful Carnival Cruise Line brand through the previously announced transfer of 3 ships, including 2 via our innovative Costa by Carnival initiative launching in 2023. All 3 ships will be placed on new itineraries, allowing Carnival to expand its drive to cruise offering. We will continue to evaluate opportunities to further optimize our brand portfolio over time. These fleet and portfolio decisions will provide strong tailwinds. And while during the pause in operations being nearly twice the size of the next closest cruise company was a distinct disadvantage for our cash burn, we will once again benefit from our industry-leading scale. And there are even greater opportunities ahead to drive revenue as we return to full occupancy and march towards strong profitability. Throughout the pause, we have benefited from the dedicated support of our loyal guests. Now, as we grow capacity in 2023 and beyond, we are redoubling efforts to attract new-to-cruise guests. About one-third of our guests have historically been new to cruise. And as you probably know, two of the most important drivers of new-to-cruise are word of mouth and advertising. With respect to word of mouth, after the pause, we have been building back our army of advocates that leave the ships, spreading the word about the unparalleled vacation experiences we deliver day in and day out. In the third quarter alone, we carried twice the number of guests we carried in all of 2021, and over 50% more than in just the prior quarter. On the advertising front, we’ve also been ramping up our efforts, having reached 2019 spend levels in just the last two quarters. In fact, until six months ago, we had spent less on advertising cumulatively over a two-year period than in all of 2019, and most of this was directed at more efficient channels like past guests. This was a conscious decision to reprioritize our resources to withstand the pause. As our brands have now been increasing their advertising investment, we will increase awareness and consideration and actively target those new-to-cruise. While we’re still carrying a higher proportion of repeat guests, we have seen an improving trend in new-to-cruise and are already two-thirds of the way back to 2019 levels. And newcomers will be absolutely thrilled once we get them on board. We are delivering a great all-inclusive vacation experience, convenient, great dining and entertainment choices, fantastic itineraries, beautiful and innovative ships and the most amazing onboard teams, providing a higher level of personalized service than you can find anywhere on land or sea. Our net promoter scores are telling us, we are delivering a phenomenal product. The issue is we are way too much of a value. We should not be priced at a significant discount to land, which is exactly the case today, anywhere from 25% to 50% based on itineraries. Bottom line, when it comes to generating demand and increasing our revenue profile, we can, should and will do better. I have begun traveling to meet with each brand president and his or her commercial team to understand their strengths, capabilities and areas for improvement. We are working through their strategies and roadmaps to seize opportunities, all while taking advantage of tactics to quickly capture price and bookings in the interim. This cuts across multiple areas of our commercial operations, driving further brand differentiation and clarity around each brand’s optimal target segment, ensuring that creative marketing speaks to each brand’s target audience, launching more effective digital performance marketing and lead generation approaches, a renewed focus on our trade relationships, another key driver of new-to-cruise demand to reduce friction points and allow our travel agent partners to more efficiently secure bookings, while continuing to support internal sales as we need all sales channels to perform at a high level to be successful. Improving revenue management execution as we continue to adapt to an evolving booking environment and using data, guests and target audience insights and cross-brand learnings to aid in all of the above. The engagement and transparency that characterize these brand sessions has been fantastic, and the sense of urgency these leaders have to drive their brands forward is real. And speaking of leaders, we actually have new leadership at the brand and throughout the organization. Since the pause began, 5 of our 9 brands have welcomed new energetic presidents, and these brand presidents have been actively bolstering the bench below them. Additionally, I have made a half dozen changes across corporate leadership in just the last few months. It’s worth noting that with the changes I’ve made to date, 6 of my 12 direct reports are now women. We are actively focused on diversity and inclusion, and we’ll continue to invest in talent and talent management. Now, diversity fits alongside our overall sustainability agenda, and we’ve been making significant progress across the board. There have probably been no greater strides than reducing our carbon intensity. Despite being over 25% larger, our carbon footprint peaked more than a decade ago. And we’ve set 2030 targets for carbon intensity to be 20% lower than 2019 levels. We will achieve this through technology upgrades currently being rolled out, investing in port and destination projects, even more focus on itinerary optimization and realizing the benefit of our fleet optimization efforts. While there is no silver bullet to decarbonization for our industry yet, we are committed to working towards a solution. To this end, I’m excited about three successful pilots we recently completed using biofuels in existing engines without modification. Turning now to the current tone of business. Pricing for our 2023 book business is currently at considerably higher levels than 2019, adjusting for FCCs. And it is very encouraging that since announcing our relaxation and protocols in mid-August, we have already seen a very meaningful improvement in booking volumes. We are now running considerably higher than 2019 levels. At the same time, we have seen a notable improvement in cancellation trends. We expect these favorable trends to accelerate as the impact of our current and planned efforts will continue to materialize as we move toward our important summer season where we make the bulk of our operating profit. When it comes to our capital structure, maintaining a strong balance sheet has always been a priority for our company. Pre-pandemic, we have been able to achieve this while investing significantly in our new build program, thanks to the substantial cash flow our company generated. Going forward, we are committed to using our cash flow strength to repair the balance sheet over time, and we’ll be disciplined and rigorous in making new build decisions accordingly. We have two ships on order in 2024 and one in 2025. We do not anticipate significant deviation annual levels for several years. This will significantly reduce our capital commitments and set us on the path to deleveraging. We have seized the opportunity to emerge as a company that is more efficient, more sustainable and more energized for the future. We have a transformed fleet, an unmatched portfolio of well-recognized brands, and unparalleled scale in an underpenetrated industry. We are strategically managing our portfolio to optimize our near- and long-term performance. We now have a tremendous opportunity to drive revenue growth by delivering measurable pricing improvements, while returning to historically high occupancy levels over time. That opportunity will drive significant free cash flow and accelerate our path to profitability, investment-grade credit ratings and higher ROIC. In the coming months, we’ll talk specifically about long-term goals and targets so that we can track progress and maintain accountability along our path. Our travel agent partners, port and destination communities, suppliers, investors, lenders and, of course, our guests are also important to our business. I plan to speak with more of our stakeholders in the coming months to gather their perspectives as we strive for continuous improvement. I would like to end by personally thanking all of our talented and dedicated team members globally, ship and shore for the heavy lifting it took to get us back to full operations. And now comes the exciting part. We get to take all of the creativity, agility and innovation that the team has built up in response to external factors throughout the pause and resumption of operations, and we now get to use that skill set to proactively drive our business forward, and to fulfill our mission are creating happiness by delivering unforgettable and much-needed vacations to our guests. And now, I’ll turn the call over to David.
David Bernstein: Thank you, Josh. I’ll start today with a review of guest cruise operations, and then provide booking trends and the current tone of business. Turning to guest cruise operations. Third quarter 2022 represents a significant milestone in the resumption of our guest cruise operations with adjusted EBITDA turning positive for the first time. We were pleased to see that third quarter 2022 revenue increased by nearly 80% compared to second quarter 2022, reflecting a continued sequential quarter-over-quarter improvement. For the third quarter, occupancy was 84%, a 15 percentage-point increase from the second quarter. We ended the quarter on a high note with 90% occupancy in the month of August. We were encouraged by the continued very close-in demand we experienced during the third quarter for the third quarter, a trend we had anticipated. Revenue per passenger day for the third quarter 2022 decreased from a strong 2019, mainly due to the impact of future cruise credits, or more commonly called FCC, and currency given the stronger U.S. dollar, along with our large presence in Europe with four brands in the UK and Continental Europe. Once again, our onboard and other revenue per diems were up significantly in the third quarter 2022 versus third quarter 2019, driven by price increases, greater spending by our guests and the increased effect of the second wallet as more guests are participating in pre-cruise sales of onboard activities. In fact, year-to-date, we have seen over 50% growth in pre-cruise sales of onboard activities on a per passenger cruise day, or PCD, basis as compared to 2019. Our teams have done an excellent job capitalizing on the opportunity in this area. As I indicated in my comments during our last business update, we expanded our bundled package offerings given their popularity. The new bundled offerings required us to make changes to the accounting allocations. As a result, in the third quarter, more of the revenue was left in ticket and less allocated to onboard, impacting the onboard and other revenue per PCD comparison for the third quarter as compared to the second quarter. Just another reason to add to the list of reasons why the best way to judge our revenue performance is by reference to our total cruise revenue metrics. On the cost side, our adjusted cruise costs without fuel in constant currency per available lower berth day, or ALBD, as it is more commonly called, for third quarter 2022 was up 14% versus third quarter 2019. We have seen a continuation of the sequential improvement quarter-over-quarter in costs throughout the year, and expect to see a continuation of the improvement in the fourth quarter of 2022, with a low double-digit increase compared to 2019, driven in part by higher advertising expense to drive revenue for 2023. We ended the third quarter 2022 with $7.4 billion of liquidity, essentially the same liquidity level as last quarter. In addition, I am pleased to report that total customer deposits, both current and long term, were $4.8 billion at third quarter 2022, approaching the record third quarter of $4.9 billion in 2019. New bookings for the third quarter of 2022 offset most of the historical seasonal decline in customer deposits, which was over $1 billion in 2019. Furthermore, to facilitate investor engagement, I wanted to mention a couple of balance sheet-related items. First, let me clarify our debt-to-capital covenant test. Our current debt-to-capital percentage is in the mid-50s using the calculation methodology in our debt agreements. This methodology allows for the add-back to equity of noncash write-offs and other adjustments, which eliminates the volatility from the pause in guest cruise operations, leaving us well within the debt-to-capital covenant limit set at 75% at the end of the third quarter 2022. Second, we will provide and will continue to do so quarterly a detailed debt schedule and a listing of ships in our fleet by brand on our website, carnivalcorp.com. To find these supplemental schedules, refer to the Financial Information tab within the Investor Relations section of the website. Next, let’s look at booking trends and the current tone of business. Booking volumes for all future sailings during the third quarter 2022 saw a continuation of the accelerated booking volumes during the second quarter and closed the gap to strong 2019 levels. We did not see any seasonal slowing of booking activity in the third quarter 2022 versus the second quarter 2022 despite the third quarter normally being a slower booking period. It is great to see booking volumes for all future sailings considerably higher than 2019 levels since the announcement of the relaxed protocols in mid-August, aligning us towards land-based vacation alternatives. However, we are still managing through the close-in nature of the booking curve caused by the Omicron variant disruption to our important wave season earlier this year and the more restrictive industry protocols in effect until very recently. This left us with more inventory to sell closer in. To optimize in this environment, we have been working to increase near-term occupancy in part by using limited promotions and opaque channels, available only to a select group of people to protect overall price integrity for 2023. Therefore, while this resulted in the cumulative advanced book position for the fourth quarter below the historical range, we believe we are well situated with our current fourth quarter 2022 book position given current booking volumes that are running significantly ahead of 2019 levels as we capitalize on closer in booking patterns. Pricing impacted in part by limited promotions in opaque channels results in our cumulative book position for fourth quarter 2022 lower compared to 2019 sailings, but primarily due to FCCs. With respect to occupancy, fourth quarter occupancy historically has been lower than third quarter given the seasonal dynamic of our business. It was a 9 percentage-point drop in 2019. However, this year, that will not be the case. Our continuing build in cabin occupancy will more than offset the seasonal decline, which will result in slightly higher fourth quarter 2022 occupancy compared to the third quarter and represents another step forward in closing the gap to 2019. For the full year 2023, our cumulative advanced book position is slightly above the historical average and at considerably higher prices compared to record 2019 levels normalized for FCCs. While I do expect an impact on 2023 yields from the FCCs, the impact is likely to be less than 1 percentage-point for the full year 2023. Additionally, during 2023, we expect improvement in occupancy, with occupancy returning to historical levels in the summer of 2023. While our return to guest cruise operations is essentially complete, we are still evaluating a few remaining deployment options as referenced in our business update release. As a result, for 2023, we expect our capacity increase to be somewhere in the range of 3% to 5% compared to 2019. Of course, with nearly 25% of our capacity in 2023 from new ships, we also expect to benefit from the efficiency gains from our fleet optimization efforts that Josh mentioned earlier, helping to mitigate inflation. In summary, looking forward to 2023, we have a strong book of business at considerably higher prices. Prices are higher in all four quarters of 2023. Onboard revenue per diems are up significantly in 2022, and this puts us on track for a record year in 2023 for onboard revenue. All of this clearly sets the stage positively for 2023, with Josh and I working together with all the brand teams to drive revenue growth over time. And now operator, let’s open up the call for questions.
Operator: [Operator Instructions] Our first question is from the line of Steve Wieczynski with Stifel. Please go ahead.
Operator: Next question is from the line of James Hardiman with Citi. Please go ahead.
Operator: Next question from the line of Robin Farley.
Operator: Our next question from the line of Jamie Katz with Morningstar. Please go ahead.
Operator: Next question from the line of Ben Chaiken with Credit Suisse. Please go ahead.
Operator: Our next question from the line of David Katz with Jefferies. Please go ahead.
Operator: Next question from the line of Ali Naqvi with HSBC. Please go ahead.
Operator: Our next question from the line of Brandt Montour with Barclays. Please go ahead.
Josh Weinstein: Thanks, Brandt. I think, operator, I think that’s all the time we have for calls today. But, thank you, everybody, for joining and listening.
David Bernstein: Yes. No, thank you very much, everybody. And look forward to working with Josh. 2023, as we said, with pricing being up considerably higher on our books and all the other things we indicated, we feel very good about 2023. So, thanks, and have a great afternoon.
Operator: That concludes today’s call. We thank you for your participation, and ask you to please disconnect your lines.
